Prefabricated Primary school at Ballarat (Stage 1) Built by Swanbuild/Pretect

FINANCE AND THE OFFSITE SECTOR:
GRAPPLING WITH THE ‘CATCH-22’ OF FINANCING MODULAR BUILDS

Despite the numerous advantages to modular or prefab buildings; financing a build often remains a stumbling block; Beverley Johanson reports on the growing and as yet un-filled gap in the market for offsite-related financial solutions.

The modular building process is fast and efficient with set costing and an accurate completion date. The quality is high, meticulously monitored at every step of manufacture, and the build is strong to withstand the rigours of transport. From an aesthetic point of view, many modular buildings are well resolved and the design usually champions sustainable values and energy efficiency. Houses range from modest properties built on a budget, to large family homes in styles ranging from traditional to contemporary.

The industry has moved a long way from the idea of the temporary remedial home or the “kit home” – a DIY product of dubious quality, unappealing aesthetics and low resale value.

And yet, financing a modular building is still a difficult hurdle to overcome.

Lending institutions are generally reluctant to provide loans and none of the mainstream lenders have a product specifically for this kind of construction, although many say that loans are evaluated on a case-by-cases basis. The tendency is to treat the idea of modular building very conservatively and anecdotal evidence shows that many applications are refused outright.

Most new-build homes are covered by variations to a standard construction loan. Banks have set protocols for construction loans whereby money is released at defined stages of the build – for example, at land purchase, the pad, frames and roof, lock-up and final stages. As one phase is complete, clients can draw on the next portion of the loan. Each time the there is a draw-down on the loan, there is improved value on the site. The full loan is only released, essentially, when the house is complete.

Apparently some manufacturers of panelised modular homes sell in sections, which can match the progress payment schedule, but most lenders will still ask that the applicant pay for the house up front.

Because the home is essentially “built” in a factory, the banks have no security over it while it is being constructed and may only lend a percentage of land value.

The resulting Catch-22 situation is that the manufacturer requires payment before the home leaves the factory, but the bank won’t consider it until the building is actually fixed on the site and connected to services.

Craig Perryman, director of Swanbuild, has been working for 10 years to improve the lot of clients seeking finance for modular buildings with recent success.

The volumetric builder, based in Swan Hill for more than 35 years, builds standard and customised homes and commercial buildings. The family company began with conventional construction and moved into modular 17 years ago.

“We had a lot of clients who were finding it very difficult to get finance, so I tried to get to the bottom of why this was happening,” he says.

Perryman then spent time with the banks in the area, particularly Westpac, and worked on educating the decision makers on 21st century modular construction.

“Once they understood the concept and the model, they had a different view,” he says.

By the time he got to Roddy Brown, Westpac general manager for agribusiness for Victoria and Tasmania, Perryman had an ally in his quest for greater understanding.

Brown spent time with Swanbuild in November and says he was impressed with the stability and longevity of the business and the quality of the buildings being produced.

“We had a lot of clients who were finding it very difficult to get finance, so I tried to get to the bottom of why this was happening,”Craig Perryman – Director, Swanbuild.

“I think in the back of my mind I had the idea that it would be more DIY — more of a kit home idea. I had no idea of the size of the homes, the design and build, and the speed and quality of construction. It was the same with the commercial and school buildings that they do.”
Brown is enthusiastic about the possibilities. “In relation to this now, I see my role as engaging with the right internal areas of the bank to increase awareness and make sure people understand what modular building is about, making it easier for the home finance lenders.”

He is now in the process of making changes to the loans policy and ensuring that awareness of this spreads throughout the Westpac network.

“We have been fighting for 10 years to get to this point,” says Perryman.

The company has also had some success with Bendigo Bank in Echuca.

“It’s critical that banks understand how modular construction works. The banks were classing all volumetric builds as kit homes.

“I don’t want it only for our company, but for the others well. This will have a knock-on effect for a lot of manufacturers,” Perryman says.

A spokesman for the ANZ Bank says that typically most modular homes involve an owner builder situation. Even when a customer subcontracts the work to trades people, it is still classified as an “owner builder” as they lack a Fixed Price Building Contract (FPBC) and also bear the construction risk.

“At present in these situations the bank will only lend to 80 per cent of the land value,” he says, an amount that does not require mortgage insurance.

A completed module leaving the Anchor Homes factory in Stratford for Wollongong, NSW.

Anchor Homes: Holiday home for a family of four in Marysville, Victoria.

Anchor Homes: Kitchen and dining area of a recently completed project in Eden, NSW.

Inside picture of the Prefabricated Early learning centre at Strathfieldsaye.
Built by Swanbuild/Pretect.

Prefabricated Primary school at Ballarat (Stage 1) Built by Swanbuild/Pretect

Exterior picture of an early learning centre at Strathfieldsaye. Built by Swanbuild/Pretect.

“The method of construction is also important. If it conforms to a standard build, where all work is done on site, in line with recognised stages of completion and is done under a FPBC with a registered builder, then this is generally fine.
We will generally be able to provide progressive loan draw-downs, upon confirmation of completed works at each of these stages. However, this tends not to be the case with many modular homes.

“The vast majority of modular homes that we tend to see are built off-site in modules, transported to the property and then put together on site. Until the modules are on site and permanently fixed, they have no value from a security perspective. Even if a registered builder completes this within his factory and provides a FPBC, this is still an issue for us if construction occurs off-site.

“There are further issues around the legal definition of the term ‘permanently fixed’. If a module / prefabricated home is delivered to the site and fixed, this is still not considered permanently fixed.

“It is only considered permanently fixed when it is fully complete and fixed to the land, is connected to all services and is fully compliant with local government regulations and certificate of occupancy issued. Progressive draws are not permitted during the building phase and the proposition will be treated as an ‘off the plan’ purchase, with one payment only at practical completion,” the spokesman says.

Anchor Homes, a family business in Gippsland, Victoria, brings together the skills of building and the meticulous practice of cabinetmaking. Ken Raikes, a third-generation cabinet maker and registered builder, and his three sons moved from Melbourne in 2003 and established a cabinet-making business, but trade was challenging.

“Out of frustration, we were looking for other things to do and we hit on modular building. We put together marketing material and put an ad in the local paper — and here we are. Last year we built 80 homes and we employ 10 to 15 staff,” says Lester Raikes, director at Anchor Homes. “The homes business quickly outgrew the cabinetmaking business.”

Anchor Homes transports modules from its 12,000 square metre factory in Stratford and caters mainly for second-plus home buyers and the holiday home market with standard and customised designs.

“Finance is a massive problem,” says Raikes. “We have lost clients due to the fact that they have gone into the local branch of their bank and been told, ‘we don’t do modular’ and that’s the end of it. We don’t know how often that happens and we just don’t hear about it.”

“We now have a finance broker who understands. She says, ‘yes. You just have to know how to do it’.

“At times, we carry the project until the building is on site and connected to services. The bank then comes and values the property, but we can’t afford to do this for every project.

“It seems that there could be a number of easy solutions. Maybe there’s a way to sign the security of the building over to the bank in the factory.”

He says that having a significant deposit, say 20 per cent to 30 per cent of the final cost, increases the customer’s chances as does, of course, equity in the land or another property.
Other factors that may have some influence include building in a suburb with high capital gain and using a long-established company.

Raikes suggests shopping around, approaching lenders or brokers early in the process and explaining that modular homes are simply an alternative construction method for a conventional home.
“The finished product is a new home, no different to any other home in the marketplace. We’ve had valuers come out after a home is finished and they haven’t realised that it’s a modular home,” he says.

CommBank, which is developing a range of innovative and flexible housing loans, says that it does finance modular homes “in certain circumstances” but declined to be more specific.

A spokesman for the Bendigo Bank/Adelaide Bank says that all applications are considered on their merits and the standard requirement is that funds will not be released until the dwelling is delivered, fixed to the land and held as security.

“Progress payments are then made in line with standard construction arrangements,” says the spokesman.

“The location of the land and the borrower’s equity along with local council and state legislative requirements will be considered during the assessment of the loan application,” he says.

The spokesman did go on to say that interested borrowers should discuss their requirements with Bendigo Bank, Delphi Bank, Alliance Bank or Adelaide Bank.

Other manufacturers and lenders have offered similar advice. Bessie Hassan, money expert at loans comparison website, finder.com.au, says: “It requires a bit of homework to secure a loan. You are probably better off going through a mortgage broker. Approach them early with your plans, specifications, timeframe — as many details as you have.
She warns that applicants need to ensure that the cost of transport and crane hire is included in the quote.

“Sometimes buyers can find flexible finance terms from a builder,” she says.
A similar comparison website, Home Loans Experts, advises applicants to have the design finalised and everything in place before approaching a lender. “Don’t change your plans. If your budget, plans, design or specifications change then most banks will reassess your application from the beginning. If you haven’t got a final budget completed or don’t have final council approved plans then apply for a pre-approval instead. Once you’re certain there will be no changes then you can apply for formal approval,” says a spokesman for the site.

Home Loan Experts also recommend looking at non-mainstream lenders. “If your situation is outside of the box then apply with a lender that can help you rather than trying to get your bank to assist you with something that is outside of their normal process or lending guidelines.”

Architect and founder of Melbourne-based manufacturer Modscape, Jan Gyrn, says that he has noticed banks are starting to be more open to the idea of modular building. “It’s a challenge to get the bank’s head around what security can be provided.”

Modscape’s clients tend not to be first-home buyers and many are knocking down and rebuilding in the inner-city. “It is a bit easier for them to manoeuvre as far as finance goes,” he says. “Building is so fast compared to conventional construction that it comes down to bridging a small gap.”

Gyrn says that with modular housing expected to triple over the next 10 years in Australia, it is highly likely that the major banks will develop products for lending on off-site construction. ■